Why is the Financial Plan so Important? The Metaphor of the Tub

20 May, 2013 — 2 Comments

Some years ago, I developed a metaphor to explain to entrepreneurs how important it is to plan the financial needs properly.

In my opinion, creating an innovative company is like having a tub full of water. The water is like the company’s money, the initial financing which makes the start-up activity possible.

At the moment of creation, it is as if the plug was taken away and the tub begins to drain. Similarly, the company will start to spend money immediately and non-stop after its creation. The entrepreneur should be ready to run the bath as soon as possible and to avoid running out of water. If this happens, the company suspends payments.

money drain2

At that moment, the entrepreneur tries desperately to turn on the faucet. In the real company it means generating revenue from the market and collecting payments as soon as possible. But usually the water doesn’t pour out as quickly as neccesary. Desperately, the entrepreneur hurries to find a bucket and fill the tub with it.

This tub’s story reminds me of the big effort some entrepreneurs make. They visit several banks, financial entities and at the last moment investors, trying to procure funds, before they take their account into the red.

Unfortunately, entrepreneurs suffer the emptying of the tub very often. To avoid it, it is very important to calculate the financial needs carefully beforehand. Then, a financial plan should be designed to meet the needs. Immediately, the entrepreneur should run to seek financing. This is one of the first challenges the moment you launch a start-up.

Formulation of the pill:

– Financial needs timetable

– Funding plan

– Running to seek financing

– Please do it before you start the activity!

Trackbacks and Pingbacks:

  1. If You Don’t Have Financing, Bootstrapping is the Solution and the Matrix’s Red Pill is your Best Medicine. « Passion for Startups - September 16, 2013

    […] run out of money soon and your startup get positive cash flows. I spoke about this at the “Metaphor of the tub” and other related […]

  2. Hesham Salman: A Story of Persistence and a Lesson about Starting Your Own Disruptive Company « Passion for Startups - November 27, 2013

    […] When you launch a company, be prepare to burn cash very quicky (See post The Metaphor of the Tub). […]

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